A New Sandisk Flash Convertible To Finance Fusion?

Don’t be surprised to see a new billion-plus dollar convertible bond from Sandisk in the very near future.

The flash memory leader announced its acquisition of Fusion IO for about $1.1 billion this morning. On the related conference call, management insisted it was comfortable using existing cash balances to pay for the deal and continuing with its plan to return free cash flow to shareholders. The market likes the deal—Sandisk shares have gained several percent since the announcement. A colleague of mine, who’s forgotten more about memory than most people know, agrees. He thinks the deal helps strategically, expanding Sandisk’s profile with enterprise customers.

Despite the company’s assurance that its cash balances will be sufficient, I think a new convertible could come out shortly. Sandisk has been a leading convertible issuer—a repeat offender, as we call them—for well over a decade. The company knows the asset class, so it knows how hungry the market is for new paper. Sandisk’s most recent convertible deal raised $1.5 billion last fall, with the company paying a mere half a percentage point while achieving a then-35% premium to the share price. Since then, Sandisk shares have appreciated about 50%.

I note that since its near-death experience during the financial crisis, when Sandisk fought off unwanted suitor Samsung, the company has consistently maintained a very strong liquidity position. If Sandisk doesn’t replenish this cash, it would have the lowest balance it’s had since 2010. Meanwhile, every major convertible banker is sure to be tripping over itself to provide aggressive terms for a new deal. Sandisk can surely do a substantially better deal than last fall’s. I’m reasonably sure that if Sandisk wanted to do another seven-year convertible, as has been its preference, it could get at least a 40% premium today if it pays another 50 basis point coupon, and it might do even better. The convertible market loves the name and both of its existing bonds are well above par.

What’s more, in order to offset the potential stock impact of such a new convertible, Sandisk would only have to use about 40% of the deal’s proceeds to buy shares or their equivalent. So Sandisk could go out and raise $2 billion, spend about $800 million on a hedge, and use the proceeds to pay for Fusion IO.